Gigaset (ETR:GGS) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Gigaset AG (ETR:GGS) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Gigaset

What Is Gigaset's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Gigaset had debt of €17.5m, up from €15.4m in one year. However, it does have €28.4m in cash offsetting this, leading to net cash of €10.9m.

How Strong Is Gigaset's Balance Sheet?

The latest balance sheet data shows that Gigaset had liabilities of €78.5m due within a year, and liabilities of €105.8m falling due after that. Offsetting this, it had €28.4m in cash and €23.9m in receivables that were due within 12 months. So it has liabilities totalling €132.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €43.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Gigaset would likely require a major re-capitalisation if it had to pay its creditors today. Given that Gigaset has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Gigaset can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Gigaset made a loss at the EBIT level, and saw its revenue drop to €243m, which is a fall of 6.9%. That's not what we would hope to see.

So How Risky Is Gigaset?

Although Gigaset had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €9.2m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Gigaset that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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